Understanding Land Loans: Complete Land Loan Guide

Many people choose to purchase an existing home to live in, but maybe your dream is slightly different. Perhaps your perfect living situation is a house you build on your own parcel of land. If this is your end goal or if you’re considering buying land as a real estate investment, you need to understand how land loans work.

Depending on where you’re buying land and how much acreage you’re getting, land prices can cover a wide range and be quite expensive. If you can’t pay for the entire cost of a property upfront, you’ll need to consider financing, which is where loans for land come in. Since land is a riskier investment than housing, lenders may require steeper interest rates and larger down payments.

Because of this, it's your responsibility to become knowledgeable about what land loans are, how they work, and what your financing options are for buying land. We’ll cover all of these topics and more in this article.

What are land loans?

Like a loan you’d get for a house, a land loan is an amount of money borrowed from a lender to assist in the acquisition of a parcel of land. People may purchase land with plans to construct a dwelling or commercial project on, to farm on, as a real estate investment, or for some other reason. You can take out a land loan to buy raw land with no development whatsoever or land with some existing amenities.

How do land loans work?

While land loans are riskier to lenders than home loans and thus can carry higher interest rates, the general process of securing a land loan is the same as the process for getting a traditional mortgage on a house. In both cases, you need to show that you’re in a good financial situation and that your credit score meets certain thresholds. You may also find that comparing multiple lenders is the best approach to finding one that offers loans for land and can provide attractive rates and loan terms.

Types of Land Loans

The three main types of land loans have to do with the state of the property you want to buy. Raw land loans apply to land that hasn’t been improved or developed whatsoever, unimproved land loans may be used for land that has some degree of enhancements, and improved land loans come into play with parcels that have the most improvements and accessibility. We’ll cover each option in more depth below.

Raw Land Loan

You will likely have the most difficulty securing a loan to buy raw land since it’s the least developed type of land. Raw land doesn’t have any utilities on it or roads, making it cheaper overall but more complex to finance. Don’t go into buying this type of land without a sensible, straightforward plan for using it.

Unimproved Land Loan

If the tract of land you want to buy has some degree of development but lacks everything necessary to be considered “improved,” it’s classified as unimproved land. Slightly less risky than a raw land loan, an unimproved land loan may still require you to pay more in a down payment and agree to higher interest rates for the life of the loan.

Improved Land Loan

An improved land loan, as it sounds, can be used for a property that has the necessary utilities and road access. Of course, the tradeoff for more improvements and a build-ready site is often a higher purchase price, but your down payment and interest rates could be more attractive than for raw or unimproved land loans.

3 Important Things to Consider Before Buying Land

Buying land may get you closer to your dream home or the next step in your evolution as a real estate investor, but you shouldn’t do it without ample research. Before you purchase a piece of land, you need to have a full picture of what you’re buying, a watertight roadmap for what you’ll do with it, and knowledge of how you’ll lock down the money to fund your plans.H3: 1. Know What You’re Buying

It can sometimes be unclear, even to the people who live on the borders of a property you want to buy, exactly where the boundary lines fall and who owns what. An official survey will give you a clearer idea of what’s included when purchasing a tract of land. To make sure you don’t buy land that you can’t use, you’ll also need to understand the zoning of the land and how it can be used.

If your land isn’t connected to city sewer, you may also have to pass a perc test to ensure the land is buildable. Lastly, get to know the neighborhood. If you plan to live on the land, make sure you know the future plans of the area. You may love the views when you first buy the land, but if an apartment complex or highway springs up right next to you down the road, you may regret your purchase.

2. Know How You’ll Use the Land

Many people don’t buy land just to own land. They, and maybe you, are often interested in purchasing land to build on it, whether immediately or in the future. Knowing your plan for the land is beneficial and sometimes crucial when it comes to determining how much of a down payment you’ll pay and how high your interest rates will be.

For example, a plan to buy land and build right away is less risky in a bank’s eyes than buying land with no defined use plans, and the former scenario may require a lower down payment than the latter.

3. Know How You’ll Pay for the Land

Whether your land is raw or improved, you need to find a way to pay for it. You have several choices for financing your investment, so the best plan of action is to research multiple lenders and options and find one that fits your particular situation. A few methods you might run across are:

  • Securing financing from area financial institutions, such as credit unions and banks. Since they understand the area, they might be willing to give better rates.
  • Working with the seller directly. If the land’s current owner is amenable to it, seller financing can cut down extra hassle and red tape.
  • Leveraging your current house’s equity. If the value is there in your current residence, you can take out a home equity loan and capitalize on the reduced interest rates and lack of down payment.

How Do You Get a Land Loan?

However you accomplish it, you will likely need some sort of financing for your land unless you’re buying it outright. Unfortunately, many banks do not offer land loans, so you’ll have to do your research to find one that does. You may have the best luck with credit unions in your area or neighborhood banks. You can also look into USDA land loans if you meet specific criteria or explore alternative financing methods.

Financing Options for Buying Land

A few standard options for buying land are to get one through a government program, work with a local lender, work directly with the seller, or take out a loan on the value of your current residence. We’ll unpack each option below.

USDA Guaranteed Loans

If you’re a rural-area resident and make a low or mid-level income, an alternative to borrowing from a traditional lender could be to apply for a USDA guaranteed loan. A construction-to-permanent loan with the U.S. Department of Agriculture can help you avoid a down payment altogether.

Area Banks and Credit Unions

Loans for land may be rarer than traditional home loans because of their risk to lenders, but there are types of lenders that will give out these loans. Often, neighborhood banking institutions or local credit unions will be better positioned to evaluate the qualities of your land and thus will be more willing to give you a loan for it.

Financing Through the Seller

If you don’t want to work with a lender or if one won’t work with you, some sellers will be willing to step in this role. With seller financing, you work directly with the current property owner to work out loan terms. This can simplify the buying process and give you the ability to buy land when you wouldn’t have been able to otherwise, but you might also be hit with heftier interest rates.

Home Equity Loan

Another option for your land loan is to pull money from your current mortgage to finance the purchase. This is called a home equity loan. If your house or another property holds enough value, it can be a wise option. Benefits of this loan type include lower interest rates and no need to put down a down payment, but it could put your house in jeopardy if you can’t make your land loan payments.

Where to Go From Here

Don’t go into land-buying without a plan. As a crucial first step, examine your motivations for buying land and be crystal clear on exactly how you envision using the land once you own it. Then, when you have your goals and priorities clear, do your research to compare different lenders and loans. If internet research isn’t giving you all the information you need, call agents at various lenders directly to get a concrete idea of the rates and options available to you.


Buy Your Dream Property Today!

All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022